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Tax Forum: Back to Basics

Tracy Byrnes

But first some housekeeping.

Last Chance for Your 4Q Estimated Tax Payment

Hey traders --- and anyone else making estimated payments for 1999 -- your last one's due by midnight EST on Monday. Thanks to 0ption11, who reminded us on the Tax Forum message board last week.

If you haven't been making payments, but you cashed out at year-end to take advantage of some gains, you might have bumped up your tax bill. You probably should consider making a fourth-quarter payment now.

Here's your rule of thumb:

To avoid paying penalties and interest come tax time, you must pay the smaller of 90% of your 1999 tax bill or 100% of your 1998 tax bill before April 15. Note that if your 1998 adjusted gross income was more than $150,000 ($75,000 for married taxpayers filing separate returns), then you have to pay 105% of your 1998 tax bill.

If, after withholdings and credits, you still expect to owe at least $1,000 in 1999 tax, make an estimated payment. Check out this previous story for more on how to do that.

Big note: If you took gains at the end of the year or got a big bonus, then you didn't receive your total income ratably throughout the year. So file Form 2210 - Underpayment of Estimated Tax by Individuals, Estates and Trusts to alert the Internal Revenue Service that your income hasn't been a steady stream. If you don't file this form, the IRS will assume you made that big amount throughout the year. Then you'll be charged interest and penalties because technically, you should have been paying Uncle Sam his fair share all along, through withholdings or estimated payments.

Form 2210 will also help you figure out the amount of your fourth-quarter estimated tax payment.

Now on to your questions. Send any other queries to taxforum@thestreet.com. Please don't forget to include your full name.

I Need an Accountant

For many years I have done my own taxes using TurboTax. I have been very happy so far. However, this year I need help. I was wondering what would be good questions to ask in the interview process, and are there certain things I should be looking for in an accountant?

-- Rob Howland

Rob,

First, may I say that you're a bigger man than most for admitting you need help.

We did a piece on picking a financial planner last year, and many of those basic questions apply here.

Just remember, you're hiring someone to help you, so put on your best "interviewer" hat. And since you've done your own tax return in the past, you have a pretty good idea of your tax situation. All this will help you find a professional who meets your needs.

To start, compile a list of potential accountants. Ask friends, family, your lawyer or banker for recommendations, suggests the American Institute of Certified Public Accountants.

Then let the interviewing begin.

You have to be completely honest with your accountant -- because Uncle Sam knows if you're not. It's very easy to forget to tell your financial planner about that extra $1,000 you play with in the options market. But your tax guy needs to know everything.

Mutual Fund Distributions

Please explain year-end distributions, I'm confused. I was under the impression that distributions were a good thing. Now I'm not so sure.

I own several Janus funds and some PBHG. They are in a traditional IRA that is taxable only when we withdraw. Why does the fund go down when distributions are made?

-- Don Birdsall

Don,

Since your funds are in an IRA, mutual fund distributions don't affect you. You're required to reinvest your distributions in an IRA. So your account balance doesn't change and you won't owe tax on the money until you start to withdraw. Let's go through the basics anyway.

In most instances, the net asset value, a.k.a. the share price, of a mutual fund declines when the fund makes a distribution to its shareholders, says Vanguard spokesman John Woerth.

Mutual funds are required to distribute all dividends and capital gains to shareholders. A fund would have dividends if it owned a stock that gave a dividend. If your fund held 3M(MMM Quote), its shares would get an annual dividend of $2.24. Capital gains are generated when a fund manager sells a holding for more than he or she originally bought it. Those gains, along with any dividends, all get passed on to you.

So in some ways distributions are a "good thing." Extra money always is. But that extra money brings extra taxes. That's why these distributions have gotten a negative connotation.

Before a distribution is made, the capital gains and dividends are still embedded in the net asset value. Once the distribution is made, the dividends and capital gains come out, so the NAV drops by that amount.

If you have this distribution reinvested, your overall positions won't change. While the NAV may be lower, you'll own more shares. Watch. Vanguard offered an example.

Let's assume you own 300 shares of a fund that has an NAV of $20. Your total investment is worth $6,000.

Now suppose your fund makes a distribution of 20 cents per share. Barring no major market blow-ups, the fund's NAV will fall by 20 cents, to $19.80. On the upside, you've got $60 (300 x 20 cents) in your pocket.

If you chose to have those distributions reinvested, the $60 would be used to buy more shares. At the new NAV of $19.80, you could afford 3.03 shares. Add that to your original 300 shares and you now own 303.03 shares of your fund.

But at $19.80 per share, you total investment still is $6,000.

Granted, if you don't reinvest your dividends, your account will be worth less -- $5,940 in this case. And if this fund was held in a taxable account, whether the distributions are reinvested or not, you'll owe tax on them in the year they're distributed.